Rising oil, tariffs and recession odds pushed markets to rethink the Fed’s next step
Futures traders have started to bet that the Federal Reserve’s next move could be a rate increase, not a cut, as investors wrestled with resurgent inflation risks and rising recession odds.
According to CME Group’s FedWatch tool, the implied probability of a higher policy rate by the end of 2026 climbed to roughly 52% late this week. That crossed the 50% mark for the first time as global benchmark crude topped $110 a barrel and war in Iran drags on.
Those expectations are contrast to Fed officials’ own projections for at least one cut this year and underscores how quickly the inflation narrative has shifted.
Inflation shock crowded the Fed’s runway
The latest scare built on a string of data pointing to renewed price pressures. The Bureau of Labor Statistics reported that import prices jumped about 1.3% in February while export prices rose 1.5%. That's the largest monthly increases since 2022, driven in part by more expensive fuel and other energy products.
The Organization for Economic Cooperation and Development raised its 2026 US inflation forecast to around 4.2%, well above both its prior projection and the Fed’s 2.7% estimate, fanning talk of a possible stagflationary mix of weaker growth and sticky prices.
Rising oil prices and the Iran conflict push OECD US inflation forecasts to 4.2% in 2026. Fed policy uncertainty could keep long-term rates high, affecting mortgage demand even as buyers regain leverage in housing.https://t.co/sOFVXPoZXc
— Mortgage Professional America Magazine (@MPAMagazineUS) March 26, 2026
Private forecasters also pushed up the odds of a downturn. Moody’s Analytics put the 12‑month US recession probability near 50%, while Goldman Sachs raised its estimate to about 30%, and firms including EY Parthenon and Wilmington Trust saw chances at 40% or higher.
Fed signaled patience even as markets braced
Despite the market repricing, policymakers did not rush to validate talk of a hike. In a speech on Thursday, Federal Open Market Committee vice chair Philip Jefferson said that the jump in oil and uncertainty over tariffs “complicates, at least in the short term, the picture on both sides of our dual mandate of maximum employment and price stability” and created “downside risk to the labor market and upside risk to inflation.”
He added: “While that is a potentially challenging situation, I am confident that our current policy stance is well positioned to respond to a range of outcomes.”
Federal Reserve governor Christopher Waller walked into last week’s meeting ready to break ranks. The February jobs report showed a loss of 92,000 positions, and for a policymaker who has worried for months about a “clearly weakening” labor market, it looked like time to cut.
Instead, a new Middle East war and a sudden oil shock pushed him back toward the consensus – and extended the wait for rate relief that mortgage professionals hoped would firm up this spring.
Mortgage pros face another season of higher-for-longer
Previously, markets largely expected the Fed to hold rates well into the 2026 spring and summer selling season, with any meaningful relief in 30‑year mortgage rates more likely to arrive alongside a late‑year cutting cycle.
Earlier cooling inflation raised hopes for deeper Fed cuts and sub‑6% mortgage rates in 2026, but energy shocks or renewed tariff uncertainty could derail that path.
The week’s repricing does not guarantee a hike, and Fed officials still point to a bias toward gradual easing if inflation cooperates.
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